Mr. Market is a fictitious investor whose illogical and conflicting reactions to the stock market represent the trappings of groupthink.
He is driven by emotions and moods instead of analysis. Like a pendulum, he swings between optimism and pessimism randomly and is triggered easily. When he’s happy, prices are high, and when miserable, prices are low.
This type of investor composes much of the stock market, and the market mirrors their collective actions.
Why Use It
When investing, you can choose what type of investor you want to be. Do you want to be driven by joy, despair, apathy, etc., and react accordingly?
Or you can ignore Mr. Market, be more prudent, act in your best interest when conditions are favorable, and execute a long game.
When to Use It
Mr. Market is a helpful archetype who personifies herd mentality and displays faulty logic. While the stock market fluctuates, it’s necessary to have a firm grasp of the big picture.
Since Mr. Market is prone to emotional upheavals, he might present you with a high price in a state of euphoria, believing you’d want to rob him of immediate gains. Conversely, he could offer you a low price when he’s sad, fearing you’d dump your interest on him.
Notably, Mr. Market doesn’t care if you ignore him, and the next day, invariably, he will present you with a new quote. If you know what you want and stay anchored to the fundamentals, you can choose when is the best time to transact.
How to Use It
Don’t let Mr. Market guide you. Instead, recognize he is there to serve you. Instead of falling prey to his mood swings, use them to your advantage. Patience is your greatest ally. If you want to invest, wait until he’s pessimistic and quotes a low price.
As a sensible investor, you’ll do well to recognize the value of an enterprise beforehand, researching its financial position, operations, and reports. That way, before you walk into a conversation with Mr. Market, you know whether or not he’s quoting a ridiculous price or a bargain. Then all you have to do is remember to hold your original judgment in high esteem.
How to Misuse It
Don’t get comfortable; it’s easy to overlook information if you’re not paying attention. Sometimes a stock price will decline for a reason, not because Mr. Market is acting up. And while stock prices fluctuate over several years, the actual value of a business is revealed. It’s wise to evolve your understanding of an enterprise as more information becomes available.
Examine your criteria for making investment decisions, and think about your current or future opportunities. The stock market is more akin to a voting machine in the short term, but it’s more like a weighing machine over time. So, don’t get carried away by how people are voting; instead, be sure you are the one doing the weighing.
Where it Came From
Benjamin Graham originally coined the concept in his 1949 book, The Intelligent Investor. He’s also well known for teaching Warren Buffet, an ardent supporter of Graham’s thinking and writing.
What Are Mental Models?
Mental models are thinking tools that help guide and shape our perceptions of the world. They simplify complexity so we can understand life better, make decisions confidently, and solve problems.